Economic Update 9-12-2017
- The short week ended with a temporary respite for the federal budget and debt ceiling debate, strong ISM services results, but higher jobless claims due to hurricane effects.
- U.S. stocks stumbled a bit on the week, as did foreign stocks in local currency terms, but the latter were saved by a large decline in the U.S. dollar for the week. Bonds experienced a positive week as yields for certain maturities fell to their lowest levels in some time. Real estate bucked the trend and fared well, while commodities were generally flat with offsetting forces.
U.S. stocks pulled back a bit on the shortened holiday week with small caps underperforming large caps. From a sector standpoint, health care and energy led the way, while technology and consumer cyclicals pulled back. With a lack of other meaningful news, uncertainty surrounding two back-to-back severe hurricanes played a role, and especially punished insurance company shares based on the spike in expected upcoming claim payouts. On the positive side, the Washington budget deal removed one element of uncertainty.
As a side note, the effects of weather disasters on markets and the economy tend to be fairly short-term in nature, with the bulk of the effect showing up in labor statistics. While these two events could and will likely depress economic activity in these regions in the near-term, rebuilding activities tend to play a positive role on GDP growth in quarters moving forward.
Foreign stocks generally lost similar ground as U.S. stocks in local terms, while a -1.5% drop in the USD index converted these into net positive results in USD terms. The ECB meeting ended with no change in policy or their quantitative easing program, although the bank noted it stood ready to increase purchases if inflation remains persistently low. Interestingly, this is counter to recent hints around both the future of the policy and future ‘tapering’. Some concern remains about the impact of the stronger euro this year on equity prospects, which have improved, which is reflected in performance. Emerging markets experienced less of a currency impact and ended flattish for the week on net.
U.S. bond yields ticked lower across the intermediate and longer part of the curve, as the 10-year treasury fell to its lowest levels since last November as investors moved away from risk and inflation estimates remain tempered. Treasuries outperformed investment-grade credit, and high yield bond returns lagged for the week. This is another reminder of the unpredictability of interest rates, especially when many experts again espoused this year that ‘we won’t get to 2 percent again any time soon’. Interestingly, on the credit side, August represented the second month in a row with no high yield bond defaults, and the first month in over three years when no bond or bank loan experienced a default. Obviously, credit conditions remain quite strong, which likely explains the increasingly tighter spreads of lower quality high yield bonds versus treasuries and their deteriorating valuation prospects; loan spreads have tightened as well, but the variable-rate component remains an attractive feature in an environment of increasingly higher short rates, now that many have reached or exceeded LIBOR, where they again can ‘float’ as intended and reset higher.
Foreign developed market debt in USD terms gained sharply, but was largely the result of a weaker dollar. EM debt returns were also affected by USD movements, with both local and hard currency ending the week higher, but local outperforming.
Real estate gained in the U.S., and even more so abroad, in contrast to broader equities, and likely aided by lower interest rates. Apartments and retail recovered somewhat, a bit better than other segments, and outperformed mortgage REITs despite lower rates.
Commodities ended flattish in the short week, as lower prices for several industrial metals due to weaker China results were offset by strength in precious metals. Despite a blip higher mid-week, crude oil closed just above where it started at $47.48; natural gas and unleaded gas declined sharply as storm concerns dissipated.
|Period ending 9/8/2017||1 Week (%)||YTD (%)|
|BlmbgBarcl U.S. Aggregate||0.46||3.92|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.